Probable versus Possible

In the context of participating in incidents with the fire department I tend to think of things as being probable or merely being possible. For example a week ago yesterday we had a small wildfire on a hill that was surrounded by houses. Based on the time of the year, the lack of wind, the footprint of the fire when we got there (which was pretty quickly) and that we had 17 people respond to the call it was not probable that the fire was going to explode into a catastrophic loss of six or seven houses. Of course it was possible that it could have gotten away, anything is possible with a wildfire and this same type of incident occurring in June would have been much more of a threat to turn into something horrible but as it turned out a bad outcome was not probable and the probabilities worked in our favor. A reader left the following comment on a post of mine that was run at Seeking Alpha. …That’s why I’m waiting for return to 400-600 on the S&P to ride the coaster from the bottom up… To me, this raises the exact same issue of probable versus possible. Of course it is possible for the S&P 500 to make a new low versus the March 2009 low but it is not probable. Getting to 666 on the SPX took a combination of the “worst financial crisis in 80 years” and an overall sentiment that was still favorably disposed to stock market participation and generally trusting of the system. In other words most participants did not...

Probable versus Possible

In the context of participating in incidents with the fire department I tend to think of things as being probable or merely being possible. For example a week ago yesterday we had a small wildfire on a hill that was surrounded by houses. Based on the time of the year, the lack of wind, the footprint of the fire when we got there (which was pretty quickly) and that we had 17 people respond to the call it was not probable that the fire was going to explode into a catastrophic loss of six or seven houses. Of course it was possible that it could have gotten away, anything is possible with a wildfire and this same type of incident occurring in June would have been much more of a threat to turn into something horrible but as it turned out a bad outcome was not probable and the probabilities worked in our favor. A reader left the following comment on a post of mine that was run at Seeking Alpha. …That’s why I’m waiting for return to 400-600 on the S&P to ride the coaster from the bottom up… To me, this raises the exact same issue of probable versus possible. Of course it is possible for the S&P 500 to make a new low versus the March 2009 low but it is not probable. Getting to 666 on the SPX took a combination of the “worst financial crisis in 80 years” and an overall sentiment that was still favorably disposed to stock market participation and generally trusting of the system. In other words most participants did not...

The Goldman Sachs Equity Call

A big fuss was made over the Goldman Sachs call yesterday advising clients that equities will be the better hold than bonds for the next few years. Here are three links recapping the call here, here and here. Before getting too excited I would remind that it is very difficult to predict what equities will do for one year let alone several years. I would zoom out on a few points of how markets and cycles tend to work. The US stock market historically has had an up year just under 75% of the time, returns are not linear so often a large portion of the gains for an entire cycle will come in just one or maybe two years. Within a cycle it is likely there will be a big up year, a big down year and then several years of relatively muted results. In 2009 the SPX was up 23%, in 2010 it was up 14% and last year it was flat. My thoughts for 2012 have been a big rally during the year that mostly retraces such that the year finishes up a little. If 2012 were to be up a little in the fashion I think will be the case or better than up a little then that would be four years without a large decline in a sequence similar to past cycles which paves the way for a down year in 2013. This conclusion is about how cycles often play out not about fundamentals and of course could be wrong. It is certainly not a given that 2012 will be an up year even...

The Goldman Sachs Equity Call

A big fuss was made over the Goldman Sachs call yesterday advising clients that equities will be the better hold than bonds for the next few years. Here are three links recapping the call here, here and here. Before getting too excited I would remind that it is very difficult to predict what equities will do for one year let alone several years. I would zoom out on a few points of how markets and cycles tend to work. The US stock market historically has had an up year just under 75% of the time, returns are not linear so often a large portion of the gains for an entire cycle will come in just one or maybe two years. Within a cycle it is likely there will be a big up year, a big down year and then several years of relatively muted results. In 2009 the SPX was up 23%, in 2010 it was up 14% and last year it was flat. My thoughts for 2012 have been a big rally during the year that mostly retraces such that the year finishes up a little. If 2012 were to be up a little in the fashion I think will be the case or better than up a little then that would be four years without a large decline in a sequence similar to past cycles which paves the way for a down year in 2013. This conclusion is about how cycles often play out not about fundamentals and of course could be wrong. It is certainly not a given that 2012 will be an up year even...

Sunday Morning Coffee

A couple of items from Barron’s to chew on. First is an article titled The Worst of Times to Buy Stocks? which features analysis from a couple of people including John Hussman. People who read Hussman at least occasionally will find his comments familiar. He notes the following current concerns with US equities; • the Standard & Poor’s 500 trading at more than 8% above its 52-week exponential moving average • the S&P 500 up more than 50% from its four-year low • the “Shiller P/E,” based on the cyclically adjusted trailing 10-year earnings, developed by Yale economist Robert Shiller, greater than 18; it’s currently 22 • the 10-year Treasury yield higher than six months earlier • the Investors Intelligence’s bullish advisory sentiment over 47%, and bearishness under 25%; in the latest data, the numbers were 47.9% bulls and 26.6% bears Hussman says these indicators add today to a list of “A Who’s Who of Awful Times to Invest” similar to past times where the market has gone on to do poorly. However he also concedes that these factors can persist for weeks or even months before the market starts to roll over. I’ve been writing about Hussman for many years as I have taken a little bit of process from him to create my own process. One difference with this part of the process is preferring to take a “defensive posture” when index price levels indicate there is a problem. An observation like the one offered by Hussman is, in my opinion, a reason to become more skeptical but not yet make portfolio changes. The indicators notwithstanding, the...

Sunday Morning Coffee

A couple of items from Barron’s to chew on. First is an article titled The Worst of Times to Buy Stocks? which features analysis from a couple of people including John Hussman. People who read Hussman at least occasionally will find his comments familiar. He notes the following current concerns with US equities; • the Standard & Poor’s 500 trading at more than 8% above its 52-week exponential moving average • the S&P 500 up more than 50% from its four-year low • the “Shiller P/E,” based on the cyclically adjusted trailing 10-year earnings, developed by Yale economist Robert Shiller, greater than 18; it’s currently 22 • the 10-year Treasury yield higher than six months earlier • the Investors Intelligence’s bullish advisory sentiment over 47%, and bearishness under 25%; in the latest data, the numbers were 47.9% bulls and 26.6% bears Hussman says these indicators add today to a list of “A Who’s Who of Awful Times to Invest” similar to past times where the market has gone on to do poorly. However he also concedes that these factors can persist for weeks or even months before the market starts to roll over. I’ve been writing about Hussman for many years as I have taken a little bit of process from him to create my own process. One difference with this part of the process is preferring to take a “defensive posture” when index price levels indicate there is a problem. An observation like the one offered by Hussman is, in my opinion, a reason to become more skeptical but not yet make portfolio changes. The indicators notwithstanding, the...